13 The prisoner’s dilemma: penalty options (years in jail)

Fig. 6.13 The prisoner’s dilemma: penalty options (years in jail)

What is the most likely outcome? If neither you nor your partner really trusts the other, particularly if previous experience has taught you to be wary of each other, then both of you will confess. Obviously the best strategy is one based on trust and hence for neither party to confess!

This simple example provides a good analogy with the real world. The conventional wisdom of purchasing has tended towards the view that multiple sources of supply for a single item are to be preferred. In such situations, it is argued, one is unlikely to become too reliant upon

a single source of supply. Furthermore we can play one supplier off against another and reduce the cost of purchases. However, such rela- tionships tend to be adversarial and, in fact, sub-optimal.

One of the first things to suffer when the relationship is based only upon negotiations about price is quality. The supplier seeks to minimize his costs and to provide only the basic specification. In situations like this the buyer will incur additional costs on in-bound inspection and re-work. Quality in respect of service is also likely to suffer when the supplier does not put any particular priority on the customer’s order.

At a more tangible level those customers who have moved over to synchronous supply with the consequent need for JIT deliveries have found that it is simply impractical to manage in-bound shipments from multiple suppliers. Similarly the communication of orders and replen- ishment instructions is so much more difficult with multiple suppliers.

6 T H E S Y N C H R O N O U S S U P P LY C H A I N

The closer the relationship between buyer and supplier the more likely it is that the expertise of both parties can be applied to mutual benefit. For example, many companies have found that by close co-operation with suppliers they can improve product design, value-engineer compo- nents, and generally find more efficient ways of working together.

This is the logic that underlines the emergence of the concept of ‘co- makership’ or ‘partnership sourcing’. Co-makership may be defined as:

The development of a long-term relationship with a limited number of suppliers on the basis of mutual confidence.

The basic philosophy of co-makership is that the supplier should be considered to be an extension of the customer’s operations with the emphasis on continuity and a ‘seamless’ end-to-end pipeline. As the trend to outsourcing continues so must the move towards co-makership. Nissan Motors in the UK have been one of the leading advocates of this concept. A key element of their approach is the use of ‘supplier devel- opment teams’, which are small groups of Nissan specialists who will help suppliers to achieve the requirements that Nissan places upon them. The overall objective of the supplier development team is to reduce the costs and increase the efficiency for both parties – in other words a ‘win-win’ outcome. Because the cost of materials in an auto- mobile can be as high as 85 per cent, anything that can reduce the costs of purchased supplies can have a significant effect on total costs.

Figure 6.14 depicts a not-untypical situation where a car manufac- turer’s purchased materials are 85 per cent of total costs. This is then exploded further where it is shown that the material costs of the compo- nent supplier are a figure closer to the average for manufacturing industry of 40 per cent. Of the remaining 60 per cent (‘supplier value added’), 80 per cent of that figure might be accounted for by overheads, of which typ- ically 30 per cent or so would be accounted for by the supplier’s logistics costs (i.e. inventory, set-up costs transport, warehousing, etc.).

What this implies is that approximately 12 per cent of the cost of materials to the car manufacturer are accounted for by the supplier’s logistics costs (i.e. 85 per cent × 60 per cent × 80 per cent × 30 per cent). When it is realized that a proportion of the supplier’s logistics costs are caused by the lack of integration and partnership between the car manufacturer and the supplier, it becomes apparent that a major opportunity for cost reduction exists.

L O G I S T I C S A N D S U P P LY C H A I N M A N A G E M E N T

Value added 15%

costs 85% Logistics

and indirects

costs 30%

Material costs 40%